OECD calls for Canada to shift mortgage risk from taxpayers to private-sector

OTTAWA • Despite aggressive moves by the federal government to limit consumers’ exposure to an overheated housing sector, a major global think-tank is warning Ottawa that even tougher measures are needed to protect taxpayers.

In particular, the government should gradually reduce its share of the mortgage-insurance market and transfer more of the risk to the private sector, the Organization for Economic Cooperation and Development said Wednesday.

Like his predecessor Jim Flaherty, the finance minister should be doing more to fight falling mortgage rates, or risk a housing hard landing, warns Sun Life CIO

Insurance provided by Canada Mortgage and Housing Corp. is currently fully backed by Ottawa for those loans that come without at least a 20% down payment by the buyer.

Also, the Ottawa-based agency can now insure mortgages up to a limit of $600-billion. The OECD suggests that ceiling could gradually be lowered and the private-sector contribution raised to $300-billion.

“Over the longer run, the insurance activities of the CMHC could be privatized, shifting the government’s role to one of guaranteeing only against catastrophic losses,” the Paris-based OECD said in a report presented to the International Economic Forum of the Americas in Montreal.

Ottawa has already intervened four times in the past five years to cool the housing market — fired by record-low lending rates — by tightening lending rules and limiting the length of mortgages.

Recent government moves have reduced the maximum period on government-insured mortgages to 25 years, and lowered the amount homeowners could borrow against their mortgage when dealing with commercial banks.

Ottawa has also hounded commercial banks — to limited success — not to cut mortgage costs even further. The concern is that already heavily indebted consumers may not be able to meet their loan payments, especially when interest rates begin to rise above the rock-bottom levels experienced in the recession.

Speaking in Montreal, OECD secretary general Angel Gurria said “we do not expect to see a generalized crash in house prices” in Canada.

“The quality of mortgage loans remains high, and macro-prudential regulation has significantly slowed credit growth,” he said in the text of his address. “Risks remain, however.”

The condominium sector, especially Toronto, “looks overbuilt.”

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“And high debt levels may put some households under financial strain as interest rates rise. Given the government’s backing of a large share of mortgage loans, taxpayers are highly exposed in the event of a major shock to housing markets.”

Through the CMHC, the government also recently stopped offering mortgage insurance for condominium developments — especially in Toronto and Vancouver — that have led the way in price increases and fanned worries that over-building would lead to a much-expected housing bubble.

That’s something Ottawa and the Bank of Canada have warned presents the biggest risk to the economy.

Finance Minister Joe Oliver said the Conservative government “has taken prudent action in the past to ensure our economy remained stable while limiting consumer indebtedness and taxpayers’ exposure to the housing market.”

“We will continue to monitor the market closely,” Mr. Oliver said Wednesday in an emailed statement from New York, where he was attending the North American Energy Summit.

“The CMHC and the Bank of Canada have both predicted a soft landing for the housing market.”

In its report, the OECD said that, “as in many countries, real house prices have increased substantially over the past decade.”

“Following an almost uninterrupted boom, they have reached record levels relative to incomes,” it said. “This has fueled debates over whether a bubble exists…. While house prices look remarkably high in certain markets, the probability of a major broad-based correction appears low.”

But David Madini, chief economist at Capital Economics in Toronto, said “clearly, it’s a major risk.”

“The government is really just coming full circle. The rules they are tightening up now are the very same rules they relaxed in the early 1990s and the past decade,” Mr. Madini said.

“I think this is a classic case of closing the barn door after the horse has bolted. I think these measures will actually reinforce the downturn in the housing market. The reason why we think prices will ultimately fall is because of oversupply, tighter credit terms and, eventually, higher mortgage rates.”

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